Electronic Swaps Trading Is Not a Myth – I have proof!

Electronic swaps trading does exist! I have proof!

There’s been little proof that electronic swaps trading has taken off, leaving most of us to believe the transformation will not happen without the Commodity Futures Trading Commission’s (CFTC) rules in place. Even at soon-to-be swap execution facilities, or SEFs, where the functionality is already built, swap prices are already streaming and users are signing up for access there has been little proof that real trades – not just the token “we did this first” public relations trades – are happening.

Until now.

In the second quarter of this year, Bloomberg’s Fixed-Income Trading (FIT) platform, which includes its single dealer pages, handled more than 25,000 trade tickets involving 24 dealers and more than 1,000 buy-side participants amounting to $1.6 trillion in notional turnover. This represents a nearly 90 percent increase in number of trades and a nearly 65 percent increase in notional turnover from the same quarter in 2010.

More compelling is the growth from nearly zero before 2008. Compared with the market as whole, trading on Bloomberg equated to 0.4 percent of the total over-the-counter (OTC) derivatives notional turnover for the period and a similar percentage for credit default swaps and interest rate swaps if looked at separately.

Tradeweb is on a similar trajectory. The firm reported growth in terms of the total delta traded in interest rate swaps – basically the real value at risk of the contracts traded. They’ve shown a roughly 50 percent increase in delta from Q2 2010 to Q2 2011. Looking at the exhibit you can see that some real growth kicked in in 2011 – further proof that swap e-trading mandates are coming and the market is giving it a shot.

Tradeweb Interest Rate Swap e-Trading

My intention here is not to show who’s taking the lead in the SEF race or that either Bloomberg or Tradeweb is having more success than the other, or anyone else, for that matter. The SEF race is way too early to call. Indeed, trying to benchmark the players would be nearly impossible since the statistics, platforms, approaches, etc. are very apples and oranges.

Rather, the takeaway here is that swaps are starting to trade electronically and both clients and dealers are moving ahead into SEF-land even without CFTC Chairman Gary Gensler’s say so.

That’s a good thing as it shows the industry is getting ready for what’s to come. The bad news is this growth will remain tempered until we finally know what we’re really dealing with. Hello, Chairman Gensler?